UK: The Basics: What Should A Dispute Resolution Clause Say?

Parties embarking on a new commercial venture together are often
positive about their relationship and focused on making it work to
their mutual benefit. Understandably, they can be reluctant to
spend much time planning for what should happen if matters later
turn sour. However, it is vital to give some thought in advance to
the dispute resolution clauses in your contract to ensure that
there is an appropriate procedure in place to deal with
disagreements in a structured and proportionate way which gives the
parties the best chance of resolving them as quickly and cost
efficiently as possible. In this article we look at some of the key
considerations when drafting an effective dispute resolution
clause.

What is the purpose of a dispute resolution clause?

A dispute resolution clause sets out the process by which the
parties intend to resolve any disputes which may arise out of their
contract. It may cover both contractual disputes (e.g. a difference
of opinion as to the meaning and effect of a particular contract
clause) and non-contractual disputes (e.g. where party A alleges
party B was negligent in its performance of the contract). There
are various different methods of dispute resolution, one or more of
which may be set out in a dispute resolution clause.

How important is it to get the dispute resolution clause
right?

It is important to ensure that the dispute resolution clause is
clear, concise, and workable. Courts and tribunals are generally
keen to uphold terms the parties have agreed, including agreements
as to the method of dispute resolution. Therefore, if the dispute
resolution clause is unclear, ambiguous or overly convoluted, there
is a risk of uncertainty about how it operates, and the possibility
of time-consuming and costly satellite disputes as to its meaning
and effect.

What should a dispute resolution clause cover?

The precise contents of a dispute resolution clause will depend
to some extent on the form of dispute resolution the parties choose
(as to which, see further below), but key considerations which
should be addressed in dispute resolution provisions include:

Which country's laws will govern the contract and be
applied in any disputes arising out of it (the governing
law)?

Who should apply the governing law and make a binding decision
on any dispute? This is set out in a jurisdiction clause (for
litigation) or an arbitration agreement (for arbitration).

What steps, if any, must the parties take to resolve their
dispute before referring it for a binding decision?

What methods of dispute resolution are available?

There are many different methods of dispute resolution, but they
broadly fall into one of two camps: non-binding or binding.

Negotiation - this is sometimes split into two
separate phases - first, negotiations between representatives of
the parties who are responsible for operating a contract on a day
to day basis and then, if that proves unsuccessful, negotiations
between senior executives with authority to settle the dispute. In
some cases negotiations may also be attended by the parties'
lawyers.

Mediation - a process whereby an independent
third party mediates between the parties to explore areas for
potential compromise. Ultimately it is still for the parties to
decide whether they can agree a resolution to their dispute.

Early Neutral Evaluation - an impartial
evaluator gives the parties a view on the merits of their
respective cases, to help them assess strengths and weaknesses and
inform negotiations, or potentially subsequent binding dispute
resolution proceedings.

In binding forms of dispute resolution, the
parties submit their dispute to a third party decision maker (e.g.
a judge or arbitrator) to make a decision which will be binding
upon them (subject to any agreed appeal process). The most common
alternatives are:

Litigation - the most commonly used and
perhaps best understood method of dispute resolution, using the
national courts to determine the dispute. Although the courts are
taking active steps to manage the cost and duration of litigation,
decisions are subject to appeal on a point of law, so it is
possible that it may take many years to reach a final, binding
decision.

Arbitration - a private process where the
parties agree that their disputes are to be resolved by one or more
arbitrators instead of the court. Arbitration can be entirely
domestic, but it is most often used to resolve disputes with a
cross-border dimension, either because arbitration awards can be
easier to enforce internationally than court judgments, or because
parties may be wary of submitting to the jurisdiction of a foreign
court. Arbitration is generally more flexible than litigation, as
the parties have scope to choose their arbitrator(s) and shape the
procedure to be adopted.

Expert Determination / Adjudication - in these
methods, a neutral third party makes a determination which is
binding on the parties and can then be enforced through the courts
if necessary. These processes are typically quick, often sought in
respect of a discrete issue, and are presided over by industry
experts, so may be suitable when the parties need a quick decision
in order to continue business, whereas litigation and arbitration
are generally much more drawn-out processes.

What is alternative dispute resolution (ADR)?

In the UK, ADR usually refers to
non-binding forms of dispute resolution, geared towards resolving a
dispute without recourse to binding determination by litigation or
arbitration. In other jurisdictions though, including North
America, ADR
refers to any method of dispute resolution other than litigation -
so arbitration is considered to be a form of ADR (even though it
produces a binding award which the parties cannot generally appeal
in the national courts).

What are the advantages and disadvantages of (non-binding)
ADR?

Non-binding ADR can be a shortcut
to resolution, and produce time and cost savings compared to the
parties going straight to a more intensive form of binding dispute
resolution. This is particularly the case where the input of a
neutral third party with an objective view provides the parties
with a fresh perspective on a dispute, and can help to break a
stalemate between parties whose positions may have become
entrenched.

Parties do, however, need to be aware that for ADR to stand a good
chance of success, they need to approach it with an open mind and
prepare adequately, rather than treating it as a 'tick-box'
exercise. In turn this means that there are incremental costs to
engaging in ADR
(including both the parties' legal costs and the fees of the
neutral third party), so if unsuccessful in determining the dispute
or narrowing the issues, ADR will add to the
overall costs of resolving the dispute rather than save them.

What is an escalation clause?

Escalation clauses are multi-tiered dispute resolution clauses,
which provide for a dispute to be escalated usually from relatively
informal discussions between the parties through gradually more
formal processes until the dispute is finally resolved one way or
another.

A tiered dispute resolution clause may, for example, provide for
the parties to negotiate for a specified period (e.g. 30 days from
notification by one party to the other of the dispute). If the
negotiations are unsuccessful, then the parties might progress the
matter to a non-binding form of ADR (e.g. mediation),
and in the absence of a resolution, ultimately escalate the dispute
to a binding dispute resolution process for a decision.

Tiered dispute resolution clauses may include all or only some
of these stages. It is perfectly possible, for example, to go
straight from negotiations between the parties, to litigation
(although see the warning below), or to use more than one form of
ADR. No one
size fits all, and there are many factors which will determine the
appropriate escalation process, including the value of the
contract, the type of disputes likely to arise, the cost of the
dispute resolution process and how quickly the parties need to
resolve matters.

Are parties bound to follow all steps of the agreed dispute
resolution process, or can they go straight to litigation /
arbitration?

This depends very much on the wording of the clause; the parties
may express that a particular step in the process is optional.
However, it is important to note that the courts of England &
Wales expect parties to attempt to resolve their dispute through
ADR, and there
may be costs sanctions for a party who fails to engage in ADR, even if that
party ultimately succeeds at trial - see our article "
do I have to consider mediation?" Therefore, even if
parties are not contractually bound to follow every step of the
dispute resolution clause, they would do well to engage in ADR in case their
dispute ultimately appears before the courts of England &
Wales.

Is it possible to provide for different dispute resolution
methods for different disputes?

Yes. Whilst it is not always possible for the parties to know in
advance what sort of disputes may arise, in some cases they will be
able to anticipate certain discrete issues, such as disputes over
valuation or technical points. The parties could for example agree
for such disputes to be referred to expert determination so that
they can be resolved quickly and cost-effectively, while agreeing
to refer more substantial disputes to litigation or
arbitration.

Is there anything else a dispute resolution clause should
cover?

Something else to consider, particularly in international
contracts, is appointing a service agent in the jurisdiction where
court proceedings would be commenced. This means that the parties
agree in their contract that court legal proceedings may be served
on their nominated representative, the service agent. This can
avoid potential disputes about whether proceedings have been
effectively served on a party resident in another country. For
discussion on the use of service agents, see our article
"All about service".

Summary

Although it can feel pessimistic to consider the "what
ifs" when drafting dispute resolution clauses at the start of
a business relationship, consideration of these points should not
be thought of as admitting the possibility of failure, rather as
giving your contract the best chance of success. The appropriate
dispute resolution clause will put you in the best position to work
through disputes in a constructive and cost-efficient way if they
do arise, and also give you the best chance of maintaining an
amicable relationship if desired.

With Christmas just around the corner, a recent UK Court of Appeal decision will serve as a timely reminder to employers that they can be held vicariously liable for the conduct of employees at social events ...

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